The USD/JPY has dropped below 155 due to a weaker US dollar and falling US yields. Market participants are looking for a potential rate hike from the Bank of Japan (BoJ), as its monetary policy remains supportive despite questions about the neutral rate. Expectations for a BoJ rate increase have gained traction from comments by Governor Ueda and a Reuters report hinting at an upcoming adjustment. This move could help strengthen the yen, which has been weakening since early October. Governor Ueda emphasized that the current policy is still accommodating. However, he did not clarify what the neutral rate is, mentioning that it can only be estimated over a broad range. The future of nominal interest rates in Japan will hinge on the position of this rate. The recent decline in USD/JPY below the 155 level is a key indicator, influenced by a weaker US dollar. Following the announcement that US CPI figures for November 2025 have moderated to 2.8%, the market now anticipates at least two more rate cuts from the Federal Reserve in the first half of 2026. This adds more downward pressure on the currency pairing. Meanwhile, the Bank of Japan is maintaining its hawkish approach, having already raised rates into positive territory in 2024, with two small hikes in 2025. Governor Ueda’s recent statements underscore the uncertainty regarding the neutral rate, making the future path of interest rate hikes unpredictable. This uncertainty is a major factor behind the current market volatility. This stands in stark contrast to the trends in 2024, when the USD/JPY soared past 160 and intervention was frequently a concern. The current strategy seems to be to sell into any strength rather than buying when prices dip. It appears that the long-term downtrend for the yen may finally be changing. In this context, traders might want to consider using derivatives to express a bearish outlook while managing risks from possible short-term reversals. Buying put options on USD/JPY provides a way to profit from further declines with defined risk. Although 3-month implied volatility is rising towards 12%, making options more costly, they offer protection against unexpected weakness in the yen. Attention is now focused on the central banks’ final meetings of the year. It is important to prepare for the upcoming December policy decisions from both the BoJ and the Fed. Traders can use short-dated options or futures to capitalize on specific price movements related to these events.

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